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The tech sell-off has continued into this week, and the large-cap tech companies that led the market rally from the front in the first half of the year have looked weak. In particular, the “Magnificent 7”, which collectively account for a disproportionately high share of the S&P 500 Index ($SPX), have looked to be on shaky ground.
Among the elite group, Tesla (TSLA), Alphabet (GOOG), and Microsoft (MSFT) have released their earnings so far, and all fell after their respective reports - with TSLA dropping by double digits. This week, three other Mag 7 stocks – Meta Platforms (META), Amazon (AMZN), and Apple (AAPL) – are set to release their quarterly reports.
Amazon stock is down 9.7% from its recent highs, and is on the cusp of moving into the correction zone. In this article, we’ll discuss why Amazon stock is going down, and whether the company’s Q2 earnings report can help the e-commerce giant reverse the tide.
Why is Amazon Stock Going Down?
To be sure, it wouldn’t be fair to single out Amazon here, as tech stocks across the board have fallen.
There were ongoing apprehensions over valuations of tech stocks, and the recent earnings suggest that some of them perhaps ran ahead of fundamentals. In that light, I see the correction in tech stocks as quite healthy, as some froth had indeed started to build up.
Amazon Q2 Earnings Preview
Analysts expect Amazon to report revenues of $148.6 billion in Q2 – a YoY rise of 10.6%. The company’s topline growth is expected in the same ballpark in the back half of the year, as well.
During the Q1 earnings call, Amazon management forecast revenue growth between 7%-11% for Q2, which fell short of the 12% growth that analysts were then expecting. Nonetheless, markets overlooked the guidance miss and sent AMZN stock higher on much better-than-expected topline and bottom-line numbers for Q1.
Currently, consensus estimates call for a 64% YoY rise in Amazon’s Q2 earnings per share (EPS). While Amazon does not provide EPS guidance, it forecast Q2 operating income between $10 billion-$14 billion versus the $7.7 billion that it reported in the corresponding quarter last year.
Tech companies’ bottom-line growth has been significantly ahead of their revenue growth over the last several quarters on relentless cost cuts. However, things could change in the coming quarters as they scale up their artificial intelligence (AI) investments.
What to Watch in Amazon’s Q2 Earnings
Apart from the headline numbers, I would also watch out for Q3 guidance during Amazon’s Q2 earnings call. The management’s commentary on the health of U.S. consumers will also be worth listening to.
The performance and outlook of enterprise-focused Amazon Web Services (AWS) will also be in focus, especially as Microsoft disappointed markets with cloud growth in the June quarter.
AMZN Stock Forecast
Analysts are quite bullish on AMZN heading into the Q2 confessional, and 43 of the 45 analysts covering the stock have rated it as a “Strong Buy.” The remaining 2 rate the stock as a “Moderate Buy,” and its mean target price of $227.58 is 25% higher than Tuesday’s closing prices.
Amazon was a top 2024 pick for multiple brokerages, and the consensus view has been getting incrementally more positive on the stock. While it's customary for analysts to revise a stock’s target price after the earnings report, a flurry of analysts has raised Amazon’s target price ahead of its Q2 report. UBS, BMO Capital Markets, Goldman Sachs, Morgan Stanley, and Truist are among the brokerages that have raised Amazon’s target price in advance of its Q2 results.
Why Amazon Stock Looks Like a Buy Ahead of Q2 Earnings
I believe Amazon stock looks like a buy ahead of its Q2 earnings. First, the stock has already come off its highs amid the tech sell-off, which sets the stage for a post-earnings rebound if the company can come up with a decent set of numbers.
Second, Amazon’s valuations look quite attractive, and it trades at a next-12-month (NTM) price-to-earnings (PE) multiple of 38x after the recent pullback. The multiple looks even more attractive considering the 67% YoY EPS growth that Amazon is expected to post in 2024. Consensus estimates call for a 23% increase in its 2025 EPS, as well.
While Amazon’s topline growth has come off the levels we saw until about 2021, it is still growing in double digits. Coupled with strong profit growth, that makes AMZN an attractive buy at these prices.
On the date of publication, Mohit Oberoi had a position in: AMZN , AAPL , META , MSFT , TSLA , GOOG . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
